So number 3 says that the ‘euroized or pegged to the euro over the entire period’ economies are doing better. Guess that means that Benn Steil and Dinah Walker find eurogeddon a silly idea too, since they were dismissing Krugman and his belief in devaluation back in 2012.

Correct me if I’m wrong, but Krugman basically bet his whole career on the prediction that super-austerity Estonia (constitutionally mandated balanced budgets, zero government debt) would severely economically underperform. And not just a little, but underperform to the extent that the lowered GDP would more than make up from the long-term benefit of not having any debt that stimulus countries were building up and would have to pay back in the future.

Instead we have the Estonian miracle: zero debt and outperforming all of its Eurozone neighbors. So, why are we not shouting this from the rooftops? This is pretty much the silver bullet that everything we think we know about Keynesian policy prescriptions, particularly Krugman’s style, has proven dead-wrong.

I can’t understand why this would be a surprise. Iceland still has currency controls, still has unsustainable debt. The western nations that are still in doldrums are uncompetitive, too much debt and government for the size of the economy.

The countries that weathered the crisis reasonably well are those who faced similar crises a few decades ago and established fiscal discipline. This crisis was hopefully a two by four across the face to policy makers who are intent on burdening their already uncompetitive economies with more costs.

Maybe the improvements in the US economy are a result of the fiscal deadlock in Washington.

The pope “has very good taste in pieces and performances both.” Tyler, does your observation imply that, contrary to what Becker and Stigler claim in their famous paper, there can be arguments about tastes?

3. Clear case of motivated reasoning (mood affiliation to Tyler). On the updated graph it’s better to be Iceland at virtually any point so the conclusion is…Icelandic policy was wrong? I don’t know why these educated adults are arguing like schoolchildren.

#3 Iceland is still better than Latvia. The authors also accuse Krugman of picking the dates that suit his argument better, but they also did that. Seeing that the Icelandic GDP just stumbled 6.5% in the last quarter, then their argument is vindicated. If they had taken the GDP in the quarter before, then Iceland would be better than all of them. From the graphs, the Icelandic recovery has been much more volatile so we can only evaluate its recovery in comparison to the baltics and Ireland in a few years. Anyway, Latvia and Estonia did not have their financial system collapse completely, so hardly a basis of comparison to Iceland.

The contrast between Iceland’s and Latvia’s employment is especially striking. Iceland’s employment has fallen from 180,200 in 2008Q2 to 173,600 in 2013Q2 or by 3.7%. Latvia’s employment has fallen from 1,142,100 in 2008Q2 to 889,000 in 2013Q2 or by 22.2%.

Of course Iceland’s NGDP rose 16.4% from 2008Q2 to 2013Q2 whereas Latvia’s fell 2.2% over the same period.

This shows why the only way to measure aggregate demand (AD) is to simply measure AD (i.e. NGDP). Changes in RGDP are next to useless owing to the highly idiosyncratic nature of AS, especially in the case of small countries.

@austerity countries: A little graph reading yields that all these countries are still 10% below their peak level, four or five years later. There are two very big difference between Iceland and the rest however. Unemployment in Iceland is about the lowest of the entire North-Atlantic regio. The setback in Iceland was also less shattering. Mind also that the Baltic countries receive grants of about 4% of GDP each year, from the EU. And yes – for a Euro pegged country that amounts to Outright Monetary Stimulus, otherwise known as ‘a helicopter drop’.